Chancellor promises to 'put fuel in the tank of the economy'

(REUTERS)

George Osborne slapped a surprise £2bn-a-year tax on North Sea oil companies to enable him to halt the spiralling cost of petrol and bring some relief to millions whose living standards are being squeezed.

In his second Budget, the Chancellor declared that he would "put fuel in the tank of the British economy" by unveiling measures to boost growth, including a 2 per cent cut in corporation tax for business next month instead of the planned 1 per cent reduction. He avoided talk of spending cuts and painted a rosy picture of an economy once the deficit had been tackled.

Mr Osborne ruled out a change of course but was unable to escape renewed charges that the cuts he announced last year are a gamble that might not pay off. The independent Office for Budget Responsibility provided a reality check by downgrading its forecast for growth this year from 2.1 per cent to 1.7 per cent.

Although he had little money to play with in a fiscally neutral package, the Chancellor raided the coffers of oil firms in a Budget aimed at families hurt by inflation running much faster than wages – the "squeezed middle" targeted by Labour.

He cut fuel duty by 1p a litre from 6pm last night, scrapped the 5p a litre rise due next month and cancelled the inflation-plus increases due under the fuel duty escalator until the next general election. However, the duty will rise in line with inflation next year and the escalator will be reintroduced if the price of oil – currently around $115 a barrel – falls below $75.

His "fair fuel stabiliser" delighted Tory MPs as it went further than they had expected. But oil companies warned that investment in the North Sea would be put at risk even though the rise in the global oil price has swollen their profits. Labour warned that oil firms would merely recoup the cost of the levy by raising pump prices. It denied the Chancellor's claim to have "cut" the cost of petrol by 6p a litre, saying his decision to raise VAT to 20 per cent in January had added 3p to a litre.

Similarly, Mr Osborne was accused of giving with one hand and taking with another after he announced a £630 rise to £8,105 in the amount of money people can earn without paying income tax from April next year. This will take 260,000 people out of tax and reduce tax bills paid by 25 million people by £48 on average. The move was the main demand from the Liberal Democrats, who were closely involved in shaping yesterday's package, as it marks another step towards their flagship goal of a £10,000 personal tax allowance.

However, the Chancellor was accused of wiping out the benefit by sneaking a "stealth tax" into the Budget's small print. In future, direct tax allowances and thresholds will rise in line with the consumer prices index (CPI) rather than the retail price index (RPI), which normally increases by about 1 per cent more. This will net the Treasury £1bn by 2015-16.

The Chancellor did not implement CPI uprating of indirect taxes, which would have benefited households at the expense of the Exchequer.

James Browne, a senior research economist at the Institute for Fiscal Studies, said the switch to raising allowances and thresholds in line with the CPI would draw more people into the 40p higher tax rate. Mr Osborne raised the hopes of business leaders and Tory MPs that the 50p top rate of tax on earnings over £150,000 a year would be shortlived. He said he regarded it as temporary, and promised a detailed review of whether it was raising as much as the Treasury had forecast. If this finds evidence that the rich are avoiding it, that could give him the cover to scrap it. The former chancellor Alistair Darling introduced the 50p rate as a temporary measure to help reduce the deficit, but Labour's policy now is to keep it.

Allies of Mr Osborne said the winners from yesterday's measures were motorists and taxpayers, and listed the losers as oil companies, tax avoiders targeted in a new crackdown, and carbon-intensive industries who would be hit by new green taxes – although these will add £6 a year to domestic energy bills in the short term.

Mr Osborne, highlighting the Coalition's desire to be more than a "cuts government", said it was moving on from last year's rescue to recovery and reform. He announced anambitious plan to merge the operation of the tax and national insurancesystems.

But Labour countered that the country needed rescuing from the Chancellor, claiming that unemployment would rise by up to 200,000 more than previously forecast before the next general election.

Critics warned that yesterday's measures would do little to soften the blow of spending cuts and tax rises announced by Mr Osborne last year.

The Resolution Foundation, a think-tank studying the impact of policies on low- and middle-income families, said many would still be worse off from next month due to cuts in help with childcare costs, the rise in national insurance and the already-implementedVAT hike.

Gavin Kelly, its chief executive, said: "While cuts to fuel duty and further increases in personal allowances will provide some limited relief, this is cold comfort in the context of pre-announced cuts."

Osborne's lost voice

It seems that the £100-an-hour voice coaching that George Osborne reportedly received while he was shadow Chancellor did not cover the basics.His delivery of yesterday's Budget was punctuated by throat-clearing after almost every sentence.

It might have been a nervous tic, but the constant ahem-ing and occasional cough prompted many commentators to wonder whether Mr Osborne would make it to the end of the hour-longoration before losing his voicecompletely.

Vocal coach Cordelia Ditton blamed the height of the lecterns in the House of Commons, chastising Mr Osborne's posture for squashing his larynx. But the Chancellor would also have done well to listen to the age-old advice for a clear voice: avoid dairy products and lubricate the vocal cords with plenty of water, honey and lemon.

The Budget in brief

Economy

Office for Budget Responsibility has cut growth forecast for 2011 to 1.7%, and to 2.5% next year, but raised GDP forecasts to 2.9% for the two following years.

Borrowing

Forecast to be £146bn, £2.5bn less than predicted, falling to £122bn next year and £101bn in 2012. Net debt to peak at 71% of national income next year, falling to 69% by 2015/16.

Petrol duties

Cut by 1p a litre. Planned inflation-linked rise in fuel duty pushed back to next year; 1p-above-inflation "fuel escalator" will not arrive until 2015.

Income tax

Personal allowance, which rises by £1,000 next month, will rise by another £630 next year, to £8,105; from next April, it will rise in line with consumer price inflation. Consultation to take place on merging income tax and national insurance.

Corporation tax

From April, corporation tax to be cut by 2% to 26%, and by 1% a year until it hits 23%. Bank levy to rise in compensation.

Home loans

First-time buyers to benefit from a £250m scheme to help with deposits. Mortgage interest relief for jobless homeowners to be extended another year.

Charitable giving

People leaving 10% of their estate to charity to get a 10% discount on inheritance tax.

Skills

Government to sponsor 40,000 new apprenticeships for jobless youths, and fund 12 new technical colleges.

Transport

Air passenger duty to be frozen for a year. £100m set aside to repair potholes; regional railways to get £200m.

Rich

With some exceptions, non-doms who have lived in the UK for more than 12 years will pay £50,000. Private jet users to pay passenger tax; 50% income tax rate to be reviewed.